Traditionally, correlations between prices of assets are attributed to common fundamental factors. However, a rich body of literature documents correlated changes in asset prices that cannot be explained by any observable common causes. By applying Manski’s framework of social interactions to asset pricing this study shows explicitly that house prices are not driven solely by the asset characteristics but also by prices of other properties. Critically, it shows that after controlling for exogenous, correlated and individual factors house prices are endogenously affected by prices of their neighbours. If prices are driven by human behaviour and social interactions then it is possible that, just like the behaviour of individuals in a group, prices are influenced by prices of their peers. The main theoretical contribution of this study is to show how, in addition to the well-documented individual, correlated and exogenous effects, house prices can be affected by prices of their peers. I refer to this as the price/peer effect. The results show a strong positive influence of a change in price of a house on the price of its neighbours. This can be interpreted as an endogenous correlation between prices of peer-houses that is not driven by any other common factors. In addition, it appears that the effect persists over time and is compounded if multiple properties renovate.

Nikodem holds a PhD and an MPhil from Cambridge University where he also completed his post-doctoral work and taught Real Estate Finance before joining the LSE in 2017. His research focuses on applied real estate economics and finance. His most recent work includes research of the financial value of sustainability in real estate markets, forecasting housing affordability and the impact of location choices on health. He is also interested in methods of measuring, modelling and forecasting prices and financial risk in real estate markets. His most recent applied work focused on developing spatial methods of indexing asset performance. He is also a co-founder of the HAIRI index of hotel investments returns.

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